Retirement Savings Basics: What’s The Purpose Of All My Accounts?

Not all retirement accounts are created equal. It's crucial to understand the purpose and advantages of each type of account to make the best choice for your future. 

In this episode, we'll delve into the different types of retirement accounts, including 401(k)s, IRAs, Roth IRAs, and several other examples.

Here are some of the topics we’ll discuss in this show:

• What are the limits of Roth IRAs? (5:51)
• Are annuities, dividends, or stocks right for me? (9:26)
• How do you choose what’s best for you and your plan? (11:20)

Full Transcript:

Ryan: Almost all of their retirement money is in these accounts that are going to be subject to ordinary income tax. So you want to kind of start thinking ahead and maybe utilize some of the other accounts that I think we'll talk about here today.

Announcer: When it comes to financial planning, you need to cut through the jargon so that you can understand how to achieve your own retirement success. This is Candid Conversations Retirement Talk with Ryan Cravitz of Cravitz Financial and Insurance Solutions.

Ben: Welcome in to Candid Conversations Retirement Talk with Ryan Cravitz of Cravitz Financial in Irvine, California. Glad to have you on the podcast today as we talk a little bit about retirement savings basics. I think this is a great one to go through, especially if you're not the most sophisticated investor or you just want to learn more about some other accounts that might be out there for saving for retirement.

We're going to go through some of those keys today, like 401(k)s, IRAs, Roth, some retirement products like annuities and dividend stocks, that sort of thing. So should be good. I want to help you better understand these advantages, disadvantages, and the purpose of utilizing one over the other. So we'll do that again with Ryan. Welcome in Ryan, what's going on?

Ryan: Hey, not too much. How you doing Ben?

Ben: I am doing well. Excited for another podcast today, and we did this last time. So I want to continue on again and throw a little getting to know you question. I liked your answer last time. This one's a little different. So I'm curious how you answer this one, but what's the worst haircut you've ever had?

Ryan: The worst haircut I ever got?

Ben: Yeah.

Ryan: From me, giving my myself.

Ben: Giving it to yourself?

Ryan: Yeah, they called that a Covid haircut. So when we were on lockdown during Covid, I gave it a shot. And the crazy thing is that people always look at my hair and they go, well, yeah, it's got to be really easy to cut your hair. And I'm proof that it's not because I made it look really bad. I get it cut really short, I get with a buzzer. It's a three on top and a one and a half on the sides, but it's so important how you blend it and things together. So anyways, I did a terrible job, but at least I gave it a shot.

Ben: So you didn't want to just shave your head, right?

Ryan: No, I don't think I'd want to go quite that. I'm not sure how that would look if I just cut it all off. So no, I don't think so. But fortunately my hair does grow very fast. I am fortunate there and it's thick, so that's funny. So I'm lucky there. So even though I did it badly, I was able to have it grow back out kind of quick and we could fix it.

Ben: Yeah, I'm sure you weren't the only one attempting the haircut during Covid too. So you're not alone. You're not alone and thankfully you didn't have to see anybody for the most part. And you can probably have bad lighting when you hop on your Zoom calls, so you can kind of hide that a little bit.

Ryan: Yeah, absolutely. Yeah, yeah, at least that was a good reason.

Ben: Yeah, absolutely. All right, let's hop into our conversation today on the podcast. And as I previewed just a minute ago, talking to Retirement Savings basics, and you want to make sure that you understand that every account that's out there, they're not created equally, right? You want to understand the purposes for each and just the advantages of each type of account and what's best for you and your future. That's always the goals to help you get in the best product and best investment for you and your family. So helping you understand some of these today will help with that.

So I'm going to start with maybe the most common, maybe you can correct me if I'm wrong on that, but 401(k)s 403(b)s 457 plans, these types of retirement plans that you often find with a company or with your employer, right?

Ryan: Yeah, absolutely. And depending upon where you work or will depend on what type of plan that you might have access to. So for instance, if you work for a private company, is a good chance you might have access to a 401k. If you're a teacher, you might have access to a 403(b) maybe if you're a government employee, maybe you have a 457. But these plans are very, very similar. The key thing to know with most of these is that these are all going to be funded on a pre-tax basis. And so that's nice. You get the tax deduction today and with some of them, like with the 401(k), if the company matches, you'll get a matching contribution to what you put in there. So that's all good. And with all of these, the money grows tax deferred, meaning you don't have to pay taxes on the growth each year.

And the downside though, of course, is that ultimately the chickens do come home to roost, so to speak, and ultimately you will have to pay taxes when you do withdraw the money from those and you have to pay taxes at ordinary income tax rates. So these are great plans if they have it available at your company, especially if it's something where they match. It's definitely something you want to take advantage of.

But I always say you want to really be cognizant of tax diversification. Sometimes people do too good of a job of saving in these plans and now all or almost all of their retirement money is in these accounts that are going to be subject to ordinary income tax. So you want to kind of start thinking ahead and maybe utilize some of the other accounts that I think we'll talk about here today.

But the one other thing I'll mention on this is some of these plans, depending on your company, may have the ability for you to fund a Roth version. So like a Roth 401(k) is an example where you're putting in money after tax, and again, it grows tax deferred and then ultimately you'll be able to pull it out tax free, all of it. So that can be nice, not necessarily the right solution. Again, tax diversification often is what's going to make most sense for most people.

Ben: All right. Well, since you mentioned Roth, let's talk about Roth next. You kind of touched on it a little bit, but is the biggest thing with the Roth Roth just the tax advantages that provides you and I guess what maybe are some of the disadvantages that come along with the Roth then?

Ryan: So yeah, I mean the one big advantage to a Roth IRA is certainly when you go to withdraw the money out, assuming it's a qualified distribution, of course you could pull that money out tax free. But the other real nice bonus to this is that it doesn't have any impact on whether or not your Social Security benefits could be taxable or not.

Also, it doesn't have any impact on what you have to pay for Medicare, understand that other types of income like when you have to withdraw money from a pre-tax account, like a 401k) as an example, and if you have based on how much ordinary income that you have to take out of that, that could cause your social security benefits to become taxable. It could cause the IRMAA surcharge for Medicare, depending upon how much you're pulling out and such. With a Roth IRA, you don't have to worry about that.

Now there's definitely some cons to funding a Roth IRA. Again, I mentioned tax diversification, and it's so important because many people get in their mind that, oh, tax rates are going up in the future and I've got to do everything I can to have only tax-free money available to me in retirement. I've got to go like all or nothing. But remember, you have a standard deduction and a lot of people that want to go all or nothing on that, totally forget that they can take advantage of utilizing that standard deduction.

In other words, you could take out some money perhaps from your 401(k) or your 403(b), your 457 and not have to pay any taxes, again by utilizing that standard deduction. So these are the things that you kind of want to think through that it's not all or nothing, and it really does make sense to diversify your taxes.

Ben: All right, very good. What about the IRA then? Because we talked 401k, that's one that we are all familiar with, but the IRA, what's the big difference there between that like the 401(k) plan?

Ryan: So when it comes to IRAs or traditional IRAs, as far as the taxation, it works the same as any of the pre-tax 401(k), pre-tax 403(b) accounts, these types, the difference is, well, there's multiple differences, but one of them is if you're going to make a new contribution, you can't contribute as much to an IRA as you could to these other plans, like a 401k and such. And that's why it's so nice if you are working and your employer does have these plans available to you that you can put away a lot more money into these plans. And of course, the match, like I had mentioned earlier.

Ben: All right, very good. So we got the IRAs, 401(k)s, 403(b), 457 plans through an employer, does some Roths, SEP IRAs. While we're talking IRAs, SEP IRA, I'm not too familiar with this product.

Ryan: So SEPs can be nice for the self-employed individual. Maybe they're just working for themselves, maybe no employees. It's a very easy plan to set up. I mean, it's as simple as setting up an IRA account really. But the nice thing is that you can contribute more to these plans than you could to an IRA. So if you're self-employed, you're not working for some employer, and so you're thinking to yourself, well, I don't have access to a 401(k) or something. This is one of the options that is available is a SEP or a SEP IRA.

Ben: Okay. And then the last thing I wanted to talk about, when you're looking at retirement savings basics or some of the products that you might utilize in retirement, annuity, CDs, dividend stocks, tell us about these.

Ryan: Well, when it comes to annuities, a couple of the more popular ones are like the MYGAs, the multi-year guarantee annuities, which works similar to a CD, although an annuity is with an insurance company. But with these, maybe you put your money in for let's say three years or five years or something like that, and you're getting a fixed rate backed by the insurance company for that period of time.

Again, kind of similar to how a CD works. And then there's other annuity options where you get to participate in the upside of a market index but not the downside. So you get to earn a pretty reasonable rate of return on those, again, without that risk of losing money. The other nice thing about annuities is that some of the products are designed to provide a guaranteed income stream for life. So you've got social security, maybe a pension, but now you want some extra guaranteed income.

Well, you can get that from an annuity, again, backed by the insurance company. CDs, of course, I think most people are familiar with those, but you can get those through the bank and you'll get a fixed rate on that CD for a certain period of time. And dividend stocks can be nice for the retiree because potentially you can get that growth opportunity, but a lot of these are going to be your bigger name stocks, your bigger name companies like a Coca-Cola, that's, more established, and they can also afford to pay out dividends. And so it could be nice within a retirees portfolio.

Ben: All right, so that's just kind of a rundown of some of the basic ways people will save what the tools they use to save. So I guess a couple questions that come up from this, Ryan, is just how does someone go about choosing what's best for them and their plan?

Ryan: Well, a lot of times it's going to come down to what's available. If you're working at a company and they have a 401(k) plan and if they provide a match, you'll almost always want to take advantage of that, at least. In fact, I can't think of any reason why you wouldn't want to. But a lot of it's going to come down to what's available. For instance, again, if you're, maybe you want to set up a SEP IRA as an example there.

Also, if you have a lot of money now in these pre-tax accounts and you have an opportunity to contribute to a Roth or a Roth 401(k) or maybe even just do a Roth conversions and move some money over, that might be something that you would want to consider as well. So it's really going to depend on a case by case basis.

Ben: And is it possible to change the account you're utilizing in your portfolio over time? Or is it kind of a hey, you choose your path and stick with it?

Ryan: Oh, for sure. The types of accounts or the different types of product mix and such that somebody has at different stages in their life is certainly going to change. I mean, a good example is with annuities. Annuities tend to be more popular with retirees or soon to be retirees because again, they can provide lifetime guaranteed income backed by the insurance company. As an example, if you're 50 years old and still working, saving for retirement, that's probably not going to be the right type of product for you. So there's all kinds of examples like this.

Ben: All right, very good. Well, if you have questions about your retirement savings, if you want some help, kind of figure out what's best for you, just want to have someone look over your portfolio and make sure you're in the best spot possible, you can always reach out CravitzFinancial.com or 714-462-9155.

Couple questions I want to throw your way. Just some ones that have come up around the office or asked to you recently that we thought we'd bring on the podcast and present here to you. I'm going to start off with this one about social security or just planning for retirement. I'm supposed to retire next month, but I haven't done any planning at all, just realized I still need to figure out my Social Security options, pension options, Medicare options, as well as what I'm going to do with the rest of my life. Should I just push back my retirement date until I figure this stuff out?

Ryan: Well, first off, I just want to say congratulations on being able to retire next month. That's a big milestone right there. And again, congratulations. But having said that, I want you to be a little cautious because there's a lot of things there. I mean, when you pull the trigger, when you make that decision to really retire, I believe you should really have a firm handle on what you're going to do when it comes to social security.

You have to understand what your different Medicare options are and such, and you should also, even outside of the real financial stuff, like you mentioned, "what am I going to do for the rest of my life"? You know, may not need to know exactly what you're going to do for the whole rest of your life, but you got to have a pretty good idea of when the alarm clock doesn't go off on that first Monday morning, and then you wake up on your own and you don't have anything on your agenda for the day. Really, what types of activities and things do you want to be involved in and do.

Because it's so important when you wake up that first Monday morning, the alarm clock doesn't go off and you wake up on your own and you don't have anything on your agenda for the day. You really want to have an idea that the moment that you retire, what are you going to want to be doing day to day? What types of activities, hobbies, maybe friends do you want to spend your time with and such? Because a lot of people do retire and they really haven't thought through that. And many retirees do get lonely and they just haven't really figured out how they want to spend their time. So I encourage you to take some time to really think through those things.

Ben: Awesome. Good stuff, Ryan, as always. And again, encourage you, if you have questions for Ryan to reach out, he is happy to sit down and start that conversation with you directly. Best way to do that is online at CravitzFinancial.com. That is the website, or you can call if you prefer to do that. It's 714-462-9155. Again, 714-462-9155. These retirement savings basics are so important. I'm glad that you helped us understand these a little bit better today, Ryan, and we'll do it again soon.

Ryan: Sounds good to me.